What is Financial Independence and why do we pursue it?
In a nutshell, financial independence is when you have enough passive income to cover your basic expenses. Being financially independent means working for money is optional.
We are pursuing financial independence because life is short. We both enjoy our jobs but we want the freedom to take time off, spend more time with our future children, and travel more.
Being financially independent also guards against having a financial emergency if something happens and one or both of us are no longer ABLE to work.
“How do you reach financial independence?”
Our basic idea is to save as much money as we can in our pre-tax accounts like 401k, 403b and 457b, cut out the things in life that don’t bring us joy, and invest in low-cost index funds. We keep our expenses down by sharing one used 2009 Honda Fit with a reconstructed title, living in a small apartment above a garage, and saving money on food by eating lots of beans and rice in the form of burrito bowls.
“How long will it take you to reach financial independence?”
We don’t actually know. We haven’t reached it yet. We’ve been pursuing it for the last few years though. Most likely we’ll be financially independent within 10 years. At that point work will become optional. If we keep up our current pace we’ll beat that by several years but we plan to have kids soon and eventually move back to Montana where our salaries will be less.
“How do you know when you are financially independent?”
The first step to finding out how much money you need in order to become financially independent is to figure out your yearly expenses. For the sake of argument we’ll say your expenses for the year come out to $40,000.
Once you have your yearly expenses multiply that number by 25 (This is commonly referred to as the 4% rule.) For this example you multiply $40,000×25 = $1,000,000.
If your expenses come out to $40,000 per year then you need $1,000,000 in your portfolio to be financially independent.
“That can’t be right! I heard you need at least $10,000,000 to retire!”
It can be extremely deflating to hear you need such a huge number. I’ve heard people talk about needing an absurd amount of money before they think they can retire. Naturally, they find that number to be well out of reach so they don’t even try.
Fortunately, people way over-estimate the dollar amount needed to become financially independent. Maybe they’re assuming you’re just going to bury your money in a hole in the ground so they figure you need $10,000,000 just incase the rats eat a bunch?
Remember it’s your yearly expenses that determine your FI (Financial independence) number. If you only plan on spending $8,000 per year then you need a portfolio of $200,000. If you don’t want to worry about being frugal and you want to spend $100,000 per year in retirement then you’ll need 2.5 million.
There’s a double-benefit of frugality while you’re working: The less you spend the more you’re able to save now and the less you need to earn in total before you’re financially independent.
“But I don’t want to retire, retirement is for the old and weak.”
That’s all fine. You don’t have to retire just because you’re financially independent. You just don’t HAVE to work for money, unless you choose to. We don’t plan on just sitting on the couch watching Netflix once we reach financial independence. We’ll watch Hulu too. Just kidding we’ll volunteer, or something.
“I love the way you write, you’re so smart! How did you come up with 25x your annual spending?”
Oh, thank you, you’re too kind. I developed the 4% rule when I was…Just kidding. I had nothing to do with the development of such mathematics. I just parrot what other, smarter people say. You might wonder why I don’t link those blogs in this post? HA! Nice try. You think I’m ready to lose all my readers after only the second post? After I get more confident I’ll start linking to better blogs like Mr. Money Mustache or The Mad Fientist …wait…damnit! Don’t read those!
Anyway the basic idea of the 4% rule is you should be able to withdraw 4% of your total portfolio every year without ever running out of money. Because math is hard I find it easier to multiply your yearly expenses by 25x in order to find your FI number.
Related:
The 4% Rule- How to Know When You’ve Reached Financial Independence
“Why don’t you run out of money? I feel like you’ll run out of money.”
You don’t run out of money because you have your portfolio invested in low-cost index funds that mirror the stock market. On average the stock market returns approximately 7-10% per year. Some years it goes up and some years it goes down but on the whole it returns about 7-10% per year. These returns are due to capital gains and dividends.
Inflation eats away 2-3% per year so to be safe experts like Mr. Money Mustache and The Mad Fientist recommend only withdrawing 4% of your total portfolio per year. I’ll explain capital gains, index funds, inflation and dividends in future posts. You should for sure subscribe because there are no other possible ways to learn these vocabulary words.
“Sounds good, how do I learn more?”
Great question! Read some of these other posts of ours! Also, just follow our blog in general. Studies show if you share this blog with your friends you’re 200% more likely to have some of your wildest dreams come true!*
Related:
Purchasing Financial Independence $11.57 at a Time
Financial Independence and the Art of Travel Hacking
Why Pursue Fi- The Pros and Cons of the Frugal Lifestyle
*Sharing this article will make little to no difference on your future success.
Did you know? Sharing this will make you happy!
2 thoughts on “Financial Independence- The Freedom to Choose”